IPG PHOTONICS CORPORATION
You should read the following discussion in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q. This discussion contains forward looking
statements that are based on management's current expectations, estimates and
projections about our business and operations. Our actual results may differ
materially from those currently anticipated and expressed in such
forward-looking statements. See "Cautionary Statement Regarding Forward-Looking
Statements."
Overview
We develop, manufacture and sell high-performance fiber lasers, fiber amplifiers
and diode lasers that are used for diverse applications, primarily in materials
processing. We also manufacture and sell complementary products used with our
lasers including optical delivery cables, fiber couplers, beam switches, optical
processing heads, in-line sensors and chillers. In addition, we offer
laser-based and non-laser based systems for certain markets and applications.
Our portfolio of laser solutions is used in materials processing,
communications, medical and advanced applications. We sell our products globally
to original equipment manufacturers ("OEMs"), system integrators and end users.
We market our products internationally, primarily through our direct sales
force. Our major manufacturing facilities are located in the United States ,
Germany , Russia and Belarus . We have sales service offices and applications
laboratories worldwide.
We are vertically integrated such that we design and manufacture most of the key
components used in our finished products, from semiconductor diodes to optical
fiber preforms, finished fiber lasers, amplifiers and complementary products.
Our vertically integrated operations allow us to reduce manufacturing costs,
control quality, rapidly develop and integrate advanced products and protect our
proprietary technology.
Factors and Trends That Affect Our Operations and Financial Results
In reading our financial statements, you should be aware of the following
factors and trends that our management believes are important in understanding
our financial performance.
COVID-19 Update. Global demand trends have been impacted by the ongoing COVID-19
pandemic and therefore remain uncertain at this time. Economic indicators
continue to show improvement from the severe contraction experienced one year
ago, which has led to an improvement in the recent demand environment in certain
regions. It is difficult to predict whether the improvement in some
macroeconomic indicators will be sustained or if it could change if there are
additional restrictions imposed as a result of a resurgence in COVID-19
infections. This uncertainty continues to make forecasting our business
challenging in the near to medium term.
Currently, our four major production facilities in the United States , Germany ,
Russia and Belarus remain open and are operating with enhanced employee safety
and sanitization protocols that have not significantly impacted productivity and
efficiency. We have vertically integrated manufacturing and many of the
components that one facility supplies to another facility are single sourced
internally and not available from third-party suppliers, for example our
semiconductor diodes manufactured in Oxford, Massachusetts . While we have
attempted to build safety stock of critical components at our various locations,
if government restrictions to address COVID-19 become more severe or if
absenteeism becomes significant as a result of a COVID-19 resurgence in the
places where we operate, it could impact our internal supply chain.
We and our customers are experiencing increased lead times for certain
components purchased from third-party suppliers, particularly electronic
components. We and our customers have also faced constraints related to
logistics, including available air cargo space and higher freight rates during
the pandemic some of which continue. While the impact of logistics constraints
has moderated, this and supply chain constraints could impact our ability to
supply products and our customers' demand for our product or readiness to accept
deliveries if there is a resurgence in COVID-19 or if governments implement new
restrictions. We believe we have the ability to meet the near-term demand for
our products, but the situation is fluid and subject to change.
We continue to monitor the rapidly evolving conditions and circumstances as well
as guidance from international and domestic authorities, including public health
authorities, and we may need to take additional actions based on their
recommendations. The measures implemented by various authorities related to the
COVID-19 outbreak have caused us to change our business practices including
those related to where employees work, the distance between employees in our
facilities, limitations on in-person meetings between employees and with
customers, suppliers, service providers, and stakeholders as well as
restrictions on business travel to domestic and international locations or to
attend trade shows, investor conferences and other events. To date, we have been
able to accommodate these changes to our business operations and continue to
meet customer demand. If guidelines from relevant authorities becomes more
restrictive due to a resurgence of COVID-19 in a particular region, the effect
on our operations could be more significant.
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Net sales. Our net sales have historically fluctuated from quarter to quarter.
The increase or decrease in sales from a prior quarter can be affected by the
timing of orders received from customers, the shipment, installation and
acceptance of products at our customers' facilities, the mix of OEM orders and
one-time orders for products with large purchase prices, competitive pressures,
acquisitions, economic and political conditions in a certain country or region
and seasonal factors such as the purchasing patterns and levels of activity
throughout the year in the regions where we operate. Net sales can be affected
by the time taken to qualify our products for use in new applications in the end
markets that we serve. Our sales cycle varies substantially, ranging from a
period of a few weeks to as long as one year or more, but is typically several
months. The adoption of our products by a new customer or qualification in a new
application can lead to an increase in net sales for a period, which may then
slow until we penetrate new markets or obtain new customers.
Our business depends substantially upon capital expenditures by end users,
particularly by manufacturers using our products for materials processing, which
includes general manufacturing, automotive, other transportation, aerospace,
heavy industry, consumer, semiconductor and electronics. Approximately 92% of
our revenues for the first half of 2021 and 90% of our revenues for the full
2020 fiscal year were from customers using our products for materials
processing. Although applications within materials processing are broad, the
capital equipment market in general is cyclical and historically has experienced
sudden and severe downturns. For the foreseeable future, our operations will
continue to depend upon capital expenditures by end users of materials
processing equipment and will be subject to the broader fluctuations of capital
equipment spending.
In recent years, our net sales have been negatively impacted by tariffs and
trade policy. New tariffs and other changes in U.S. trade policy could trigger
retaliatory actions by affected countries, and certain foreign governments.
We are also susceptible to global or regional disruptions such as political
instability, geopolitical conflicts, acts of terrorism, significant fluctuations
in currency values, natural disasters, macroeconomic concerns and particularly
the impact of the COVID-19 outbreak that affect the level of capital
expenditures or global commerce. With respect to the COVID-19 outbreak
specifically, while our financial results for the six months ended June 30, 2021
improved as compared to quarterly results achieved during 2020, the possible
effect over the longer term continues to remain uncertain and dependent on
future developments that cannot be accurately predicted at this time, such as
the severity and transmission rate of the coronavirus or new variants, the
extent and effectiveness of containment actions taken, the approval,
effectiveness, timing and widespread vaccination of the global population, and
the impact of these and other factors on our customer base and general
commercial activity.
The average selling prices of our products generally decrease as the products
mature. These decreases result from factors such as increased competition,
decreased manufacturing costs and increases in unit volumes. We may also reduce
selling prices in order to penetrate new markets and applications. Furthermore,
we may negotiate discounted selling prices from time to time with certain
customers that place high unit-volume orders.
The secular shift to fiber laser technology in large materials processing
applications, such as cutting applications, had a positive effect on our sales
trends in the past such that our sales trends were often better than other
capital equipment manufacturers in both positive and negative economic cycles.
As the secular shift to fiber laser technology matures in such applications, our
sales trends are more susceptible to economic cycles which affect other capital
equipment manufacturers.
Gross margin. Our total gross margin in any period can be significantly affected
by total net sales in any period, by competitive factors, by product mix, and by
other factors such as changes in foreign exchange rates relative to the U.S.
Dollar, some of which are not under our control. For instance,
•As our products mature, we can experience additional competition which tends to
decrease average selling prices and affects gross margin;
•Our gross margin can be significantly affected by product mix. Within each of
our product categories, the gross margin is generally higher for devices with
greater average power. The higher power products often have better performance,
more difficult specifications to attain and fewer competing products in the
marketplace;
•Higher power lasers also use a greater number of optical components, improving
absorption of fixed overhead costs and enabling economies of scale in
manufacturing;
•The gross margin for certain specialty products may be higher because there are
fewer or sometimes no equivalent competing products;
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•Customers that purchase devices in greater unit volumes generally are provided
a lower price per device than customers that purchase fewer units. In general,
lower selling prices to high unit volume customers reduce gross margin although
this may be partially offset by improved economies of scale; and finally,
•Gross margin on systems and communication components can be lower than the
gross margin for our laser and amplifier sources, depending on the
configuration, volume and competitive forces, among other factors.
We expect that some new technologies, products and systems will have returns
above our cost of capital but may have gross margins below our corporate
average. If we are able to develop opportunities that are significant in size,
competitively advantageous or leverage our existing technology base and
leadership, our current gross margin levels may not be maintained. Instead, we
aim to deliver industry-leading gross margin by growing sales, by taking market
share in existing markets, or by developing new applications and markets we
address, by reducing the cost of our products and by optimizing the efficiency
of our manufacturing operations.
As a high proportion of our costs is fixed, they are generally difficult to
adjust or may take time to adjust in response to changes in demand. In addition,
our fixed costs increase as we expand our capacity. If we expand capacity faster
than is required by sales growth, gross margins could be negatively affected.
Gross margins generally decline if production volumes are lower as a result of a
decrease in sales or a reduction in inventory because the absorption of fixed
manufacturing costs will be reduced. Gross margins generally improve when the
opposite occurs. If both sales and inventory decrease in the same period, the
decline in gross margin may be greater if we cannot reduce fixed costs or choose
not to reduce fixed costs to match the decrease in the level of production. If
we experience a decline in sales that reduces absorption of our fixed costs, or
if we have production issues, our gross margins will be negatively affected.
We also regularly review our inventory for items that are slow-moving, have been
rendered obsolete or determined to be excess. Any provision for such
slow-moving, obsolete or excess inventory affects our gross margins. For
example, we recorded provisions for slow-moving, obsolete or excess inventory
totaling $7.6 million and $6.0 million for the three months ended June 30, 2021
and 2020, respectively, and $15.6 million and $14.4 million for the six months
ended June 30, 2021 and 2020, respectively.
Selling and general and administrative expenses. In the past, we have invested
in selling and general and administrative costs in order to support continued
growth in the Company. As the secular shift to fiber laser technology matures,
our sales growth becomes more susceptible to the cyclical trends typical of
capital equipment manufacturers. Accordingly, our future management of and
investments in selling and general and administrative expenses will also be
influenced by these trends, although we may still invest in selling or general
and administrative functions to support certain initiatives even in economic
down cycles. Certain general and administrative expenses are not related to the
level of sales and may vary quarter to quarter based primarily upon the level of
acquisitions and litigation.
Research and development expenses. We plan to continue to invest in research and
development to improve our existing components and products and develop new
products, components, systems and applications technology. We believe that these
investments will sustain our position as a leader in the fiber laser industry
and will support development of new products that can address new markets and
growth opportunities. The amount of research and development expense we incur
may vary from period to period.
Goodwill and long-lived assets impairments. We review our intangible assets and
property, plant and equipment for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment at least annually. Negative industry or
economic trends, including reduced estimates of future cash flows, disruptions
to our business, slower growth rates, lack of growth in our relevant business
units or differences in the estimated product acceptance rates could lead to
impairment charges against our long-lived assets, including goodwill and other
intangible assets.
Our valuation methodology for assessing impairment requires management to make
significant judgments and assumptions based on historical experience and to rely
heavily on projections of future operating performance at many points during the
analysis. Also, the process of evaluating the potential impairment of goodwill
is subjective. We operate in a highly competitive environment and projections of
future operating results and cash flows may vary significantly from actual
results. If our analysis indicates potential impairment to goodwill in one or
more of our reporting units, we may be required to record charges to earnings in
our financial statements, which could negatively affect our results of
operations.
As discussed above, we continue to monitor the effect of the COVID-19 pandemic
on our business and the potential affect it may have on the recoverability of
our long-lived assets. The future effects of COVID-19 remain uncertain as more
variants start to emerge on a global basis. If the future effects of COVID-19
accumulate and become larger or if our ability to predict the impact becomes
more certain, it may become a triggering event which would cause us to evaluate
the carrying value
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of our amortizable long-lived assets or to evaluate the carrying value of
goodwill prior to the annual assessment date. If our analysis indicates
potential impairment to goodwill, amortizable intangibles or right-of-use assets
in one or more of our reporting units, we may be required to record charges to
earnings in our financial statements, which would negatively affect our results
of operations.
Foreign exchange. Because we are a U.S. -based company doing business globally,
we have both translational and transactional exposure to fluctuations in foreign
currency exchange rates. Changes in the relative exchange rate between the U.S.
dollar and the foreign currencies in which our subsidiaries operate directly
affects our sales, costs and earnings. Differences in the relative exchange
rates between where we sell our products and where we incur manufacturing and
other operating costs (primarily in the U.S. , Germany , Russia and Belarus ) also
affects our costs and earnings. Certain currencies experiencing significant
exchange rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen
and Chinese Yuan have had and could have an additional significant impact on our
sales, costs and earnings. The appreciation of the Russian Ruble and Euro,
partially offset by the appreciation of the Chinese Yuan created a foreign
exchange loss for the quarter ended June 30, 2021 because our Russian and
European subsidiaries have certain net assets denominated in U.S. Dollars, and
our Chinese subsidiary has certain net liabilities denominated in U.S. Dollars.
Our ability to adjust the foreign currency selling prices of products in
response to changes in exchange rates is limited and may not offset the impact
of the changes in exchange rates on the translated value of sales or costs. In
addition, if we increase the selling price of our products in local currencies, this could have a negative impact on the demand for our products. Major customers. While we have historically depended on a few customers for a large percentage of our annual net sales, the composition of this group can change from year to year. Net sales derived from our five largest customers as a percentage of our net sales was 23% for the six months endedJune 30, 2021 and 24%, 21% and 26% for the full years 2020, 2019 and 2018, respectively. One of our customers accounted for 27% and 21% of our net accounts receivable as ofJune 30, 2021 andDecember 31, 2020 , respectively. We seek to add new customers and to expand our relationships with existing customers. We anticipate that the composition of our significant customers will continue to change. We generally do not enter into agreements with our customers obligating them to purchase a fixed number or large volume of our fiber lasers or amplifiers. If any of our significant customers substantially reduced their purchases from us, our results would be adversely affected. Results of Operations for the Three Months EndedJune 30, 2021 Compared to the Three Months EndedJune 30, 2020 Net sales. Net sales increased by$75.3 million , or 25.4%, to$371.7 million for the three months endedJune 30, 2021 from$296.4 million for the three months endedJune 30, 2020 . The table below sets forth sales by application: Three Months Ended June 30, 2021 2020 Change (In thousands, except for percentages) Sales by Application % of Total % of Total Materials processing$ 345,653 93.0 %$ 271,708 91.7 %$ 73,945 27.2 % Other applications 26,005 7.0 % 24,703 8.3 % 1,302 5.3 % Total$ 371,658 100.0 %$ 296,411 100.0 %$ 75,247 25.4 % 20
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The table below sets forth sales by type of product and other revenue:
Three Months Ended June 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power Continuous Wave ("CW") Lasers $ 189,744 51.1 % $ 157,478 53.1 % $ 32,266 20.5 %
Medium Power CW Lasers 18,177 4.9 % 10,692 3.6 % 7,485 70.0 %
Pulsed Lasers 61,773 16.6 % 42,577 14.4 % 19,196 45.1 %
Quasi-Continuous Wave ("QCW") Lasers 15,525 4.2 % 13,708 4.6 % 1,817 13.3 %
Laser and Non-Laser Systems 29,597 8.0 % 24,942 8.4 % 4,655 18.7 %
Other Revenue including Amplifiers,
Service, Parts, Accessories and Change in
Deferred Revenue 56,842 15.2 % 47,014 15.9 % 9,828 20.9 %
Total $ 371,658 100.0 % $ 296,411 100.0 % $ 75,247 25.4 %
Materials processing
Sales for materials processing applications increased due to higher sales from
high power lasers, pulsed lasers, other laser products and service, medium power
lasers, laser and non-laser systems, and QCW lasers. Sales for materials
processing applications improved as markets recover from being negatively
affected by the COVID-19 pandemic in early 2020.
•The increase in high power laser sales related to metal cutting and welding
applications. Within cutting applications, increased sales were attributable to
a recovery in the global demand environment from the impacts of a global
lockdown related to the COVID-19 pandemic. Even though the decrease in average
selling prices moderated as compared to one year ago, the overall growth was
partially offset by a decline in average selling prices and increased
competition in China . The increase in sales of high power lasers used in welding
applications was driven by higher sales into electric vehicle battery and
general manufacturing industries.
•Medium power sales increased due to increased demand from 3D printing for
metal-based additive manufacturing, welding and cutting applications.
•Pulsed laser sales increased due to growth in sales of green pulsed lasers used
for solar cell manufacturing and infrared pulsed lasers used for marking and
engraving as well as battery processing applications, partially offset by
decreased demand of pulsed lasers used for ablation applications.
•QCW laser sales increased due to increased demand for fine processing and
consumer electronics applications.
•The increase of revenue in laser systems was attributable to higher demand for
laser systems used for cutting applications. The increase of revenue in
non-laser systems was attributable to higher demand in the transportation
sector.
•Other revenue for materials processing increased due to higher parts and
service revenue.
Other applications
Sales from other applications increased due to higher demand in lasers used for
medical procedures and advanced applications, partially offset by decreased
demand in telecom products.
Cost of sales and gross margin. Cost of sales increased by $31.1 million , or
19.4%, to $191.1 million for the three months ended June 30, 2021 from $160.0
million for the three months ended June 30, 2020 . Our gross margin increased to
48.6% for the three months ended June 30, 2021 from 46.0% for the three months
ended June 30, 2020 . The increase in gross margin was driven by a reduction of
manufacturing costs as a percentage of sales and an increase in absorption of
manufacturing expenses into inventory as a percent of sales primarily due to
higher sales versus the year ago period. These benefits were partially offset by
an increase in cost of product sold from inventory as a percentage of sales
which is primarily a result of lower average selling prices and variation in
product mix.
Sales and marketing expense. Sales and marketing expense increased by $1.9
million , or 11.0%, to $19.2 million for the three months ended June 30, 2021
compared with $17.3 million for the three months ended June 30, 2020 . This
change was primarily a result of increases in personnel costs. As a percentage
of sales, sales and marketing expense decreased to 5.2% for the three months
ended June 30, 2021 from 5.8% for the three months ended June 30, 2020 , mainly
due to increased sales.
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Research and development expense. Research and development expense increased by
$3.6 million , or 11.4%, to $35.2 million for the three months ended June 30,
2021 , compared to $31.6 million for the three months ended June 30, 2020 . This
change was primarily a result of increases in personnel costs and materials used
for research and development projects. As a percentage of sales, research and
development expense decreased to 9.5% for the three months ended June 30, 2021
from 10.7% for the three months ended June 30, 2020 , mainly due to the increase
in sales.
General and administrative expense. General and administrative expense increased
by $4.7 million , or 17.8%, to $31.1 million for the three months ended June 30,
2021 from $26.4 million for the three months ended June 30, 2020 . This change
was primarily a result of increases in personnel costs. As a percentage of
sales, general and administrative expense decreased to 8.4% for the three months
ended June 30, 2021 from 8.9% for the three months ended June 30, 2020 , mainly
due to the increase in sales.
Impairment of long-lived assets and other restructuring charges. We did not
incur impairment of long-lived assets and other restructuring charges for the
three months ended June 30, 2021 , compared to charges of $1.2 million in total
for the three months ended June 30, 2020 , of which $0.4 million related to
severance and $0.1 million related to lease termination costs as part of
restructuring of our submarine network division. We also incurred $0.7 million
of non-cash long-lived impairments related to machinery and equipment.
Effect of exchange rates on net sales, gross profit and operating expenses. We
estimate that, if exchange rates relative to the U.S. Dollar had been the same
as one year ago, which were on average Euro 0.91 , Russian Ruble 72 , Japanese Yen
108 and Chinese Yuan 7.09 , respectively, we would have expected net sales to be
$22.9 million lower, gross profit to be $12.8 million lower and total operating
expenses to be $1.3 million lower.
Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $2.8
million for the three months ended June 30, 2021 as compared to a $12.8 million
loss for the three months ended June 30, 2020 . Our Russian and European
subsidiaries have certain net assets denominated in U.S. Dollars, and our
Chinese subsidiary has certain net liabilities denominated in U.S. Dollars. The
foreign exchange loss for the three months ended June 30, 2021 was primarily
attributable to appreciation of the Russian Ruble and Euro, partially offset by
a gain attributed to appreciation of the Chinese Yuan as compared to the U.S.
Dollar. The foreign exchange loss for the three months ended June 30, 2020 was
primarily attributable to appreciation of the Russian Ruble and Euro as compared
to the U.S. Dollar.
Interest (expense) income, net. Interest expense, net was $0.4 million for the
three months ended June 30, 2021 as compared to interest income, net of $1.9
million for the three months ended June 30, 2020 . The change in interest
(expense) income, net is due to a reduction in yields on cash equivalents and
short term investments.
Provision for income taxes. Provision for income taxes was $22.2 million for the
three months ended June 30, 2021 compared to $11.1 million for the three months
ended June 30, 2020 , representing an effective tax rate of 24.2% and 22.5% for
the three months ended June 30, 2021 and 2020, respectively. The increase in tax
expense in 2021 is primarily due to an increase in income. For the three months
ended June 30, 2021 and 2020, the net discrete tax benefits were $0.1 million
and $3.1 million , respectively, primarily related tax deductions for
equity-based compensation that exceeded compensation expense recognized.
Net income attributable to IPG Photonics Corporation . Net income attributable to
IPG Photonics Corporation increased by $31.6 million to $69.8 million for the
three months ended June 30, 2021 compared to $38.2 million for the three months
ended June 30, 2020 . Net income attributable to IPG Photonics Corporation as a
percentage of our net sales increased by 5.9 percentage points to 18.8% for the
three months ended June 30, 2021 from 12.9% for the three months ended June 30,
2020 due to the factors described above.
Results of Operations for the Six Months Ended June 30, 2021 Compared to the Six
Months Ended June 30, 2020
Net sales. Net sales increased by $171.5 million , or 31.4%, to $717.2 million
for the six months ended June 30, 2021 from $545.7 million for the six months
ended June 30, 2020 .
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The table below sets forth sales by application:
Six Months Ended June 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Application % of Total % of Total
Materials processing $ 662,894 92.4 % $ 489,782 89.8 % $ 173,112 35.3 %
Other applications 54,349 7.6 % 55,871 10.2 % (1,522) (2.7) %
Total $ 717,243 100.0 % $ 545,653 100.0 % $ 171,590 31.4 %
The table below sets forth sales by type of product and other revenue:
Six Months Ended June 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power CW Lasers $ 360,226 50.2 % $ 276,794 50.7 % $ 83,432 30.1 %
Medium Power CW Lasers 34,059 4.8 % 21,945 4.0 % 12,114 55.2 %
Pulsed Lasers 117,168 16.3 % 74,416 13.6 % 42,752 57.5 %
QCW Lasers 29,191 4.1 % 23,581 4.3 % 5,610 23.8 %
Laser and Non-Laser Systems 56,713 7.9 % 43,576 8.0 % 13,137 30.1 %
Other Revenue including
Amplifiers, Service, Parts,
Accessories and Change in
Deferred Revenue 119,886 16.7 % 105,341 19.4 % 14,545 13.8 %
Total $ 717,243 100.0 % $ 545,653 100.0 % $ 171,590 31.4 %
Materials processing
Sales for materials processing applications increased due to higher sales of
high power lasers, pulsed lasers, other laser products and service, laser and
non-laser systems, medium power lasers, and QCW lasers.
•The increase in high power laser sales related to metal cutting and welding
applications. Within cutting applications, increased sales were attributable to
a stronger global demand due to recovery from the COVID-19 pandemic, partially
offset by continued competition affecting average selling prices in China . The
increase in sales of high power lasers used in welding applications was driven
by higher sales into electric vehicle battery and general manufacturing
industries.
•The increase in medium power sales related to an increase in demand from 3D
printing and laser sintering used for metal-based additive manufacturing,
cutting and welding applications.
•Pulsed laser sales increased due to growth in sales of green pulsed lasers used
for solar cell manufacturing and infrared pulsed lasers used for marking and
engraving as well as battery processing applications including foil cutting,
partially offset by decreased demand of pulsed lasers used for ablation
applications.
•QCW laser sales increased due to higher demand for fine processing and consumer
electronics applications.
•The increase of revenue in laser systems was attributable to higher demand for
laser systems used for cutting and welding applications. The increase of revenue
in non-laser systems was attributable to higher demand in the transportation
sector.
•Other revenue for materials processing increased due to higher demand of parts
and service.
Other Applications
Sales from other applications decreased due to decreased demand for lasers used
for medical procedures and telecom products, partially offset by higher sales
for lasers used for advanced applications.
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Cost of sales and gross margin. Cost of sales increased by $66.4 million , or
21.7%, to $372.7 million for the six months ended June 30, 2021 from $306.3
million for the six months ended June 30, 2020 . Our gross margin increased to
48.0% for the six months ended June 30, 2021 from 43.9% for the six months ended
June 30, 2020 . Gross margin increased mainly due to a reduction of manufacturing
costs as a percentage of sales and an increase in absorption of manufacturing
expenses into inventory as a percent of sales primarily due to higher sales
versus the year ago period. Gross margin also benefitted from a decrease in cost
of product sold from inventory as a percent of sales as compared to the six
months ended June 30, 2020 .
Sales and marketing expense. Sales and marketing expense increased by $2.1
million , or 5.8%, to $38.1 million for the six months ended June 30, 2021 from
$36.0 million for the six months ended June 30, 2020 , primarily as a result of
increases in personnel costs. As a percentage of sales, sales and marketing
expense decreased to 5.3% of sales for the six months ended June 30, 2021 from
6.6% for the six months ended June 30, 2020 , mainly due to the increase in
sales.
Research and development expense. Research and development expense increased by
$5.1 million , or 8.0%, to $68.5 million for the six months ended June 30, 2021 ,
compared to $63.4 million for the six months ended June 30, 2020 , primarily as a
result of an increase in personnel costs and expenses related to materials used
for research and development projects, partially offset by a decrease in
expenses for outside processing. As a percentage of sales, research and
development expense decreased to 9.6% for the six months ended June 30, 2021
from 11.6% for the six months ended June 30, 2020 , mainly due to the increase in
sales.
General and administrative expense. General and administrative expense increased
by $7.7 million , or 14.4%, to $61.2 million for the six months ended June 30,
2021 from $53.5 million for the six months ended June 30, 2020 , primarily as a
result of increases in personnel costs, information systems, gifts and
donations, and outside processing. As a percentage of sales, general and
administrative expense decreased to 8.5% for the six months ended June 30, 2021
from 9.8% for the six months ended June 30, 2020 , mainly due to the increase in
sales.
Impairment of long-lived assets and other restructuring charges. We did not
incur impairment of long-lived assets and other restructuring charges for the
six months ended June 30, 2021 , compared to charges of $1.2 million in total for
the six months ended June 30, 2020 , of which $0.4 million related to severance
and $0.1 million related to lease termination costs as part of restructuring of
our submarine network division. We also incurred $0.7 million of non-cash
long-lived impairments related to machinery and equipment.
Effect of exchange rates on net sales, gross profit and operating expenses. We
estimate that, if exchange rates relative to the U.S. Dollar had been the same
as one year ago, which were on average Euro 0.91 , Russian Ruble 69 , Japanese Yen
108 and Chinese Yuan 7.04 , respectively, we would have expected net sales for
the six months ended June 30, 2021 to be $39.8 million lower, gross profit to be
$22.8 million lower and total operating expenses would have been $0.7 million
lower.
(Gain) loss on foreign exchange. We reported a foreign exchange gain of $4.3
million for the six months ended June 30, 2021 as compared to a gain of $6.8
million for the six months ended June 30, 2020 . Our Russian and European
subsidiaries have certain net assets denominated in U.S. Dollars, and our
Chinese subsidiary has certain net liabilities denominated in U.S. Dollars. The
gain for the six months ended June 30, 2021 was primarily attributable to
depreciation of the Euro, partially offset by appreciation of the Russian Ruble
as compared to the U.S. Dollar. The gain for the six months ended June 30, 2020
was primarily attributable to depreciation of the Russian Ruble, partially
offset by depreciation of the Chinese Yuan as compared to the U.S. Dollar.
Interest (expense) income, net. Interest expense, net, was $0.9 million for the
six months ended June 30, 2021 as compared to $4.9 million of income for the six
months ended June 30, 2020 . The change in interest (expense) income, net is due
to a reduction in yields on cash equivalents and short term investments that
resulted in lower market interest rates as compared to prior year rates.
Provision for income taxes. Provision for income taxes was $42.6 million for the
six months ended June 30, 2021 compared to $22.4 million for the six months
ended June 30, 2020 , representing an effective tax rate of 23.6% and 23.0% for
the six months ended June 30, 2021 and 2020, respectively. The increase in
expense is primarily related to an increase in income. For the six months ended
June 30, 2021 and 2020, the net discrete tax benefits were $4.4 million and $5.9
million , respectively, primarily related to the tax deductions for equity-based
compensation that exceeded compensation expense recognized.
Net income attributable to IPG Photonics Corporation . Net income attributable to
IPG Photonics Corporation increased by $63.3 million to $137.9 million for the
six months ended June 30, 2021 compared to $74.6 million for the six months
ended June 30, 2020 . Net income attributable to IPG Photonics Corporation as a
percentage of our net sales increased by 5.5
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percentage points to 19.2% for the six months ended June 30, 2021 from 13.7% for
the six months ended June 30, 2020 due to the factors described above.
Liquidity and Capital Resources
The following table presents our principal sources of liquidity:
June 30, December 31,
2021 2020
(In thousands)
Cash and cash equivalents $ 754,199 $ 876,231
Short-term investments 743,210 514,835
Unused credit lines and overdraft facilities 130,843 132,048
Working capital (excluding cash, cash equivalents and short-term investments)
537,278 542,433
Short-term investments at June 30, 2021 , consist of liquid investments including
corporate bonds, commercial paper, certificates of deposit and municipal bonds
with original maturities of greater than three months but less than one year.
See Note 5, "Fair Value Measurements" in the notes to the condensed consolidated
financial statements for further information about our short-term investments.
We believe that our existing cash and cash equivalents, short-term investments,
our cash flows from operations and our existing lines of credit provide us with
the financial flexibility to meet our liquidity and capital needs. We expect to
continue investments in capital expenditures, to assess acquisition
opportunities and to repurchase shares of our stock in accordance with our
repurchase program. The extent and timing of such expenditures may vary from
period to period. Our future long-term capital requirements will depend on many
factors including our level of sales, the impact of the economic environment on
our growth including any ongoing impact of the COVID-19 pandemic on certain
global or regional economies, global or regional recessions, the timing and
extent of spending to support development efforts, expansion of global sales and
marketing activities, government regulation including trade sanctions, the
timing and introductions of new products, the need to ensure access to adequate
manufacturing capacity and the continuing market acceptance of our products.
The following table details our line-of-credit facilities and long-term notes as
of June 30, 2021 :
Description Total Facility/ Note Interest Rate Maturity Security
U.S. Revolving Line of Credit $75.0 million LIBOR plus 0.80% to April 2025 Unsecured
(1) 1.20%, depending on our
performance
Euro Credit Facility Euro 50.0 million Euribor plus 0.75% or July 2023 Unsecured,
(Germany) (2) ($59.4 million ) EONIA plus 1.00% guaranteed by parent
company and German
subsidiary
Other Euro Facility (3) Euro 2.0 million Euribor plus 2.02% December 2021 Common pool of
($2.4 million ) assets of Italian
subsidiary
Long-term Secured Note (4) $18.3 million Fixed at 2.74% July 2022 Secured by the
corporate aircraft
Long-term Unsecured Note (5) $17.8 million 1.20%
above LIBOR, May 2023 Unsecured
fixed using an interest
rate swap at 2.85% per
annum
(1) This facility is available to certain foreign subsidiaries in their
respective local currencies. At June 30, 2021 , there were no amounts drawn on
this line; however, there were $3.3 million of guarantees issued against the
line which reduces total availability.
(2) This facility is also available to certain foreign subsidiaries in their
respective local currencies. At June 30, 2021 , there were no drawings on this
facility; however, there were $2.6 million of guarantees issued against the line
which reduces total availability.
(3) At June 30, 2021 , there were no drawings. This facility renews annually.
(4) At maturity, the outstanding note balance will be $15.4 million .
(5) At maturity, the outstanding note balance will be $15.4 million .
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Our largest committed credit lines are with Bank of America N.A . and Deutsche
Bank AG in the amounts of $75.0 million and $59.4 million (or 50.0 million Euro
as described above), respectively, and neither of them is syndicated. We plan to
seek amendments of our credit agreements and notes to modify LIBOR and Euribor
reference rates as these rates are phased out as borrowing reference rates.
We are required to meet certain financial covenants associated with our
U.S. revolving line of credit and long-term debt facility. These covenants,
tested quarterly, include an interest coverage ratio and a funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
The interest coverage covenant requires that we maintain a trailing twelve-month
ratio of EBITDA to interest on all obligations that is at least 3.0:1.0. The
funded debt to EBITDA covenant requires that the sum of all indebtedness for
borrowed money on a consolidated basis be less than three times our trailing
twelve months EBITDA. Funded debt is decreased by our cash and available
marketable securities not classified as long-term investments in the U.S.A. in
excess of $50 million up to a maximum of $500 million . We were in compliance
with all such financial covenants as of and for the three months ended June 30,
2021 .
The financial covenants in our loan documents may cause us to not make or to
delay investments and actions that we might otherwise undertake because of
limits on capital expenditures and amounts that we can borrow or lease. In the
event that we do not comply with any one of these covenants, we would be in
default under the loan agreement or loan agreements, which may result in
acceleration of the debt, cross-defaults on other debt or a reduction in
available liquidity, any of which could harm our results of operations and
financial condition.
See Note 10, "Financing Arrangements" in the notes to the condensed consolidated
financial statements for further information about our facilities and term debt.
The following table presents cash flow activities:
Six Months Ended June 30,
2021 2020
(In thousands)
Cash provided by operating activities $ 203,190 $ 130,256
Cash used in investing activities (283,643)
(35,204)
Cash used in financing activities (35,684)
(23,471)
Operating activities. Net cash provided by operating activities increased by$72.9 million to$203.2 million for the six months endedJune 30, 2021 from$130.3 million for the six months endedJune 30, 2020 , primarily due to an increase in net income and noncash expenses, partially offset by an increase in cash used by changes in other assets and liabilities, including working capital. Our largest working capital items typically are inventory and accounts receivable. Items such as accounts payable to third parties, prepaid expenses and other current assets and accrued expenses and other liabilities are not as significant as our working capital investment in accounts receivable and inventory because of our vertically integrated structure. Accruals and payables for personnel costs including bonuses and income and other taxes payable are largely dependent on the timing of payments for those items. The increase in cash provided by operating activities in 2021 primarily resulted from an increase in cash provided by net income after adding back non-cash charges, a decrease in cash used by income and other taxes payable; an increase in cash provided by accrued expenses and an increase in cash provided by accounts payable; partially offset by an increase in cash used by inventory and a decrease in cash provided by accounts receivable. Investing activities. Net cash used in investing activities was$283.6 million for the six months endedJune 30, 2021 as compared to cash used in investing activities of$35.2 million in 2020. The cash used in investing activities in 2021 related to$229.0 million of net purchases of short-term investments and$54.3 million of capital expenditures. The cash used in investing activities in 2020 related to$37.4 million of capital expenditures, partially offset by$1.6 million of net proceeds of short-term investments. In 2021, we expect to incur between$130 million to$150 million in capital expenditures, excluding acquisitions. Capital expenditures include investments in property, facilities and equipment to add capacity worldwide to support anticipated revenue growth, increase vertical integration, increase redundant manufacturing capacity for critical components and enhance research and development capabilities. The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow. If we obtain financing for certain projects, our cash expenditures would be reduced in the year of expenditure. Many of the capital expenditure projects that we undertake have long lead times and are difficult to cancel or defer to a later period. 26
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Table of Contents Financing activities. Net cash used in financing activities was$35.7 million for the six months endedJune 30, 2021 as compared to net cash used of$23.5 million in 2020. The cash used in financing activities in 2021 related to the purchase of treasury stock of$41.7 million ,$2.6 million of payments of purchase price holdbacks from business combinations and$1.9 million of principal payments on our long-term borrowings; partially offset by, proceeds of$10.6 million from the exercise of stock options net of amounts disbursed in relation to shares withheld to cover employee income taxes due upon the vesting and release of restricted stock units. The cash used in financing activities in 2020 was related to the purchase of treasury stock of$28.2 million ,$1.9 million of principal payments on our long-term borrowings and$1.7 million of payment of a purchase price holdback from a business combination, partially offset by$8.3 million from the exercise of stock options net of amounts disbursed in relation to shares withheld to cover employee income taxes due upon the vesting and release of restricted stock units. Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information are forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1, "Business" and Item 1A, "Risk Factors" of Part I of the Form 10-K filed with theSEC for the year endedDecember 31, 2020 (the "Annual Report"). Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with theSecurities and Exchange Commission . In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to rely on such forward-looking information. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Recent Accounting Pronouncements See Note 2 in the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial statements contained in Item 1 of this Quarterly Report.
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